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Ito's lemma for the log of a GBM with mu 3, sigma 4

Question

Suppose a price follows dSt=3St dt+4St dWtdS_t=3S_t\,dt+4S_t\,dW_t for a standard Brownian motion WW. The log-price Xt=ln⁡StX_t=\ln S_t then satisfies dXt=a dt+b dWtdX_t=a\,dt+b\,dW_t for constants a,ba,b. Compute a2+b2a^2+b^2.

Short answer

4141. Ito's lemma on ln⁡x\ln x gives dXt=(μ−12σ2)dt+σ dWt=(3−8)dt+4 dWtdX_t=(\mu-\tfrac12\sigma^2)dt+\sigma\,dW_t=(3-8)dt+4\,dW_t, so a=−5a=-5, b=4b=4 and a2+b2=25+16=41a^2+b^2=25+16=41.

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